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Yahoo!’s Turnaround Strategy (Again!)

Posted on Wednesday, Apr 28th 2010

Yahoo! (NASDAQ:YHOO) turned fifteen this quarter, and I doubt it is happy with where it is currently. Carol Bartz still seems to be struggling with figuring out what needs to be done and is busy reshuffling management. The company did sell off a few non-profitable ventures, but I would have preferred that it had taken more serious steps in strengthening its verticals to get its growth story back in place. As it stands, more mumbo jumbo from Yahoo!’s confused HQ.

In the recently reported quarter, Yahoo! did manage to surpass all expectations on earnings. But revenues were all together a different matter. Q1 revenues of $1.13 billion fell from $1.15 billion a year ago and were also shy of the market’s expectations of $1.17 billion. EPS of $0.15, however, was significantly higher than the market’s projected $0.09, mostly due to the strict cost control measures Yahoo! adopted during the last year.

By segment, marketing services or ad revenues grew 3% over the year while fee revenue declined 11%. Within ads, search ad revenues fell 14% over the year and online display advertising grew 20%. The market was projecting 11%–12% growth in online display advertising. Things are improving in search advertising. For the month of March, Yahoo’s! share of the U.S. search market rose 0.1% to 16.9% after a series of sequential declines. The company believes that the search share decline has bottomed and is now working on “product enhancements” and marketing to increase search volume.

Yahoo! is also focusing on video and the social networking space to grow. The company aims to build a consistent and improved video platform across all its properties to increase ad revenues. Some of its efforts are already showing good results. Yahoo! recently launched a Toyota-sponsored news show, “Who Knew?” on Yahoo! News. The show recorded over 1 million streams during the first two days of its launch. Yahoo! is working on launching similar shows for other verticals. It also tied up with Walmart for the retail chain’s single largest digital ad campaign where the two have created three branded Web entertainment channels targeted at mothers through articles and videos on home improvement, personal makeovers, and cooking tips.

Within the social networking space, Yahoo! Meme, a service similar to Twitter, is also poised for growth. Meme was launched last year in Portuguese and will soon have English and Spanish versions as well. For email, Yahoo! is talking about plans similar to Google Buzz. But, given the concerns that were sparked by Buzz, I’m not sure that is the right path for Yahoo! to take.

Yahoo! recently sold HotJobs to Monster for $225 million and open source email service Zimbra to VMWare. Yahoo! had acquired Zimbra for $350 million in 2007 and while its sale price is not known, many believe that Yahoo! made a significant loss in the transaction. I never understood why they bought it in the first place.

Yahoo! seems to be using these receipts to grow inorganically. It is looking to acquire FourSquare for an estimated $100 million. FourSquare, which was launched in March 2009, is a location service-based social network application for smart phones. While it is no Facebook, it already boasts of more than 800,000 members around the globe. It is interesting to note that nearly four years ago, Yahoo was talking of acquiring Facebook for $1 billion, a company it recently lost its second-biggest Web site title to.

Yahoo! recently acquired Citizen Sports, a maker of fantasy sports applications for social networks and mobile devices. Citizen Sports offers fantasy leagues for sports that fans can manage online at social networking sites and through mobile applications. With this acquisition, Yahoo! is looking to boost its social networking offerings and enhance its sports vertical.

Hopefully, Yahoo! will also focus on strengthening some of its other verticals which need much more work. For instance, within travel, Kayak would be a good acquisition. Kayak’s revenues are estimated at $150 million for 2009. Analysts project it to grow at a compounded rate of 18% a year to reach $242 million by the year 2012. Yahoo’s key rival, Google, is already in talks with ITA Software for a $1 billion buyout. Kayak is estimated to be worth $705 million–$770 million and will help Yahoo! to compete with Google if the Google deal goes through.

Similarly, Trulia, the property search engine could help boost Yahoo!’s real estate vertical. Trulia had nearly 2.8 million unique visitors for March this year and has been estimated to be worth $150 million–$200 million. Google was rumored to be in talks with Trulia as well. Other acquisitions could be TheFind.com within Lifestyle, Indeed.com within job searchWesabe within finance and Shutterfly to enhance their FlickR offering. TheFind.com currently has over 5.2 million unique visitors and has seen traffic grow 14% over the year. Indeed.com has over 9.2 million unique visitors and has seen a marginal drop of 2% in traffic since last year.

Yahoo’s stock is currently trading at $17.48 with a market capitalization of $24.7 billion. It touched a 52-week high of $19.12 earlier this month. At the end of the quarter, it was sitting with cash balance  of $1.3 billion and a total current asset balance of $4.6 billion. I would rank Kayak and Indeed as their much-needed acquisitions followed by Trulia, Shutterfly, and TheFind to help get their business back in order.

I have been saying this for three years now – Yahoo! needs to do a vertical roll-up. Stop this mumbo jumbo and get serious, Madame Bartz!

Enough, really, ought to be enough.

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